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With the Chinese government sitting on a huge chunk of the current world cotton supply and an outlook for sharp acreage cutbacks in the U.S. this year, support should continue for prices in the 80-cent range, says O.A. Cleveland, Jr.

“We’re in an exciting cotton market now,” he said at the Mississippi Farm Bureau Federation’s annual commodity conference at Jackson, Miss.

“It’s not the $1.50 to $2.00 excitement we saw in 2010, but it is impressive from the standpoint that many analysts and market experts have been suggesting prices in the 45 cents to 60 cents range. Even the International Cotton Advisory Committee, one of the very best analytical organizations, has suggested we’d be seeing a price somewhere between 65 cents and 75 cents.

“If you believe in technical analysis, as I very strongly do, it is just a study of the history of prices, and with a world carryover in the neighborhood of 80 million bales — nearly 10 million more than we’ve ever had — history tells us that prices should be at such-and-such a level.”

But, says Cleveland, “There is something different about this particular market — and that difference is China. The Chinese government has taken their entire crop of some 48 million bales and essentially locked it away in their strategic reserve. The government pays cotton growers directly, and this is cotton for which they’ve paid between $1.41 and $1.45.

“They have something over $30 billion invested in this crop, which is almost as much as the USDA’s entire budget for farm commodity programs (not counting its food programs).

“This is a very interesting situation because of the impact it’s having on the world market. People say, well they’ve got all that cotton and they’re just going to let the bottom fall out of the market. But, the Chinese are very astute in finance and marketing, and with all the money they’ve got invested in their own cotton, and with half the world’s cotton supply locked up, it’s not likely they want a big drop in the market.”

China just recently started offering for sale quantities of their cotton, Cleveland says. “They were offering textile mills 2008 crop cotton; now they’re offering 2011 crop cotton. But they’re not getting many takers. They’re only selling about 20 percent to 25 percent what they offer on a daily basis.

“They’re selling middling 1-3/32 cotton to the textile mills for $1.38 per pound roughly. The mills can buy a bale of U.S. cotton and land it in China for $1.27 per pound, with about a 15 percent tariff paid on it. Because of the cost, Chinese textile mills by and large aren’t using Chinese cotton; much of it is imported, some from the U.S.

“Chinese spinning mills aren’t particularly active. The government is officially holding the price of their cotton very high to textile mills, which makes them uncompetitive with international mills. They’ve also maintained a very low polyester price, so Chinese mills can buy polyester 10 percent cheaper than last year. In other markets around the globe, polyester is only 2 percent to 3 percent cheaper. So for whatever reason, China hasn’t lowered their polyester price and they are very favorable toward using polyester in their textile mills.”